Jobs Number Not as Strong as It Looks

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. The U.S. economy added 223,000 jobs last month, but is this enough to really get us back on track? I'm here with Bob Johnson--he's our director of economic analysis--for closer look.

Bob, thanks for joining me.

Bob Johnson: Great to be here today.

Glaser: So, let's actually start by going back to March's numbers, which were revised sharply lower. What do you think about that revision? Does that change the way that you think about this 223,000 number?

Johnson: It absolutely does. I think the previous estimate was 126,000 jobs for March; now it's about 85,000. That's a really large move for one month of revisions. And so that kind of made the comparison for April look much easier than it was. So, the 223,000 isn't quite as good as people thought it was because we took numbers off of last month and, by comparison, it makes this month look a little better. So, it's probably not as good as people thought [just by] looking at the headline numbers and saying it met expectation. Yes, it kind of did, but we got there the wrong way.

Glaser: I know that you often don't like to look at it just month to month. You like to take a look at some broader measures. Does it seem like employment growth remains broadly on track?

Johnson: Yeah, it does. We're still kind of in that 2.3% range when you look at it year over year on the nonfarm payroll basis. In fact, it still looks a little bit high relative to GDP growth, which we think, year over year, will be about 2.5% here in the second quarter. Usually, there's a bigger spread, so it suggests that either GDP has to go up some or employment and growth rates have to come down some. I think we'll get a combination of both of those. But it would certainly suggest to me from the GDP numbers that we're not going to see a huge acceleration in employment.

Glaser: It does seem like there's almost been a deceleration there. We went from, last year, adding about 260,000 jobs a month to much less than that now so far this year. Do you think we're kind of getting into almost a new normal of job growth that's much lower?

Johnson: I think that the numbers for some reason--and we've talked about this before--in late 2015 just had a real pop. There was a combination of getting really good economic data that was totally unexpected right in the middle of when corporations were doing their budgets and doing their fourth-quarter last-minute hiring--that use-it-or-lose-it [money in their budgets]. And so I think all of those things caused kind of an artificial pop in the numbers, and I think we've kind of settled back here a little bit. I think the 250,000 or 260,000 jobs we were seeing was unsustainable. In fact, that's kind of where my forecast still is--250,000 jobs--but that's looking a little bit too strong at the moment.

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Glaser: So, do you plan to revise that lower, then?

Johnson: I think we'll have to re-evaluate that; something more like 230,000 looks like a better estimate to me. And keep in mind that the average for the last 12 months has been something like 257,000 jobs and, for the last three months, we're at 191,000. So, I'm still saying we're going to get better to get to 230,000, but I think that 250,000 is kind of off the table right now.

Glaser: Taking a deeper look at the report then, what sectors added jobs? Where employers are hiring?

Johnson: I think there are three key sectors on the growth side of the house. Certainly, professional and business services did well, adding more than 62,000 jobs, almost double the 12-month average. So, that was really good to see. Those are high-paying jobs, white-collar jobs that we generally think of as finance, accounting, management--all of those things. And those all did particularly well this month. So, that's good to see because that's at the core of what people think of as [the economy doing well].

Also, doing well was construction, which we like to see do well because it's a high-paying, high-hours job. And again, we were at around 45,000 jobs--double the average in the last 12 months of 22,000. And again, it wasn't necessarily new-home construction; a lot of it was probably in remodeling and services to fix up your home and your business, which did particularly well. So, those were a couple of key categories. And then not quite as strong but up 50% over averages is health care. We added about 45,000 jobs there and, again, we had expected better utilization at hospitals and expected more employment there. We hadn't really seen it. We finally got that jump, and we added about 45,000 jobs in that category.

On the negative side of the street, we lost about 10,000 mining jobs. Certainly, the oil and gas situation continues to weigh, and that number also showed some pretty strong decreases in wages, too.

Glaser: So, the economy added some jobs in some higher-paying categories--did that impact wage growth?

Johnson: Actually, it didn't have the positive effect that we might have expected on that. Wage growth was about 0.1% month to month; but it was 2.2% year over year. If you adjust for inflation, it's still 2.2%, which is a really high number for wage growth. So, not all is lost. It was a relatively good number for the consumer on a year-over-year basis. The one disappointment, obviously, is we had hoped to see as much as we 0.3% in this individual month because of Target (TGT) and Wal-Mart (WMT) both raising their minimum wage. I don't know if it's payroll timing or what, but I would have expected at least to see it in the retail number, which we didn't. And that's a smaller category where this number would have made a difference. We still had relatively limited wage growth in the retail sector. Hopefully, that's to come in the months ahead, but it certainly wasn't in this month's report.

The silver lining, though, with this number being relatively low is that if this number got out of hand--say, ran 0.3% to 0.4% for two or three months in row--that would certainly prompt the Fed to take some pretty strong action, because hourly wage growth is the one that really pops the inflation rate, and that's what they are really worried about and [would impel them to] change their programs in a hurry.

Glaser: The unemployment rate ticked down. Any surprises there?

Johnson: I thought maybe it might stay flat, but we came in at 5.4%, which is kind of in the range of full employment. So, that's certainly good news. The participation rate was relatively flat, so we didn't get there the wrong way, so to speak, by people dropping out of the workforce. So overall, I was pleased with that number, but it's such a lagging indicator that I'm not a big fan of using that as a metric.

Glaser: Well, let's look at the Fed, then. You mentioned if they saw wage growth that could be something that would force them to raise rates. Looking at this report, looking at the revisions before, does this change the timeline for the Fed raising short-term rates?

Johnson: Well, again, I've always thought it was a little bit of a folly trying to guess the month, but you always force my hand and I've always said September. And it still feels like September to me. I don't think that certainly there is enough worry out there right now. I don't see any big rush to do this in June. And so, I'm thinking that it will most likely happen in September, and I think that will be the first time that we'll start to see the Fed's funds rate go up and all their adjustments to push rates a little bit higher.

I do think we'll see it this year. They really don't want to have these extraordinary programs ongoing. The only other thing that's out there is that interest rates have come down more than we even thought because of situation in Europe and their [quantitative easing]. This week, those rates backed up considerably in Europe, I think, for a variety of reasons. And I guess there's been a little bit stronger economic growth; a lot of people have been raising their economic forecast for Europe.

Some of that's just in anticipation. I don't know that we've actually seen better numbers just yet, but they're all thinking it's better. The QE program has been in place for a few months, and so we've actually seen the bond-buying, much like the QE here in the U.S., the bulk of the move in lower rates actually comes before it's implemented. When the rumor mill is going strong--from the initial announcement until they can do the actual implementation--[you see the rates go down]. And then when the implementation comes, the rates actually start to move back up. That's exactly what's happened in Europe right now, and that's forcing the yield curves up around the world.

Glaser: So, this could be a sign that we should be prepared for some bond-market turmoil as we get ready for this exit? Or do you think the Fed has appropriately groomed the market?

Johnson: I think they are trying really hard to groom the market. But the only way it'll get out of control here is if rates around the world start going up. Money is the ultimate fungible commodity. Rates could move up a little bit more than they want them to move up just because of bond-market actions as the bondholders gets a little bit scared. And I think that's a little bit of what we're seeing.

David Sekera, our chief bond analyst, has been talking about this for some time: With the negatives rates, it's a greater fool's game going on--who would buy a bond that gives you less money back? The only hope was that they would do something more in terms of easing and that would make the bond go up even more. But we had a situation where banks were paying money to lenders, and that is not a sustainable situation. I think, as those European rates have begun to move up a little bit, it has forced rates up around world.

Glaser: Bob, thanks for your analysis this morning.

Johnson: Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.